Misalignment under different exchange rate regimes: The case of Turkey

Abstract

The paper examines misalignment of the Turkish lira between 1998 to 2008. Misalignment, specifically overvaluation has been linked to fixed exchange rate regimes. By studying the case of Turkey during this period which covers both a fixed and floating exchange rate regime, we contribute to the literature on the relation between misalignment and exchange rate regimes. We first estimate the equilibrium real exchange rate for Turkey, then compute misalignment and finally test for structural breaks in the misalignment series. Through our tests we find three structural regimes which we call the pre-crisis period, the transition period and the post-crisis period. We find considerable overvaluation in first regime, which is when Turkey had a fixed exchange rate regime. This was not the case for the periods that had floating exchange rates. Thus, we conclude that overvalued currencies that have been linked to financial crises are a more serious concern for fixed exchange rate regimes.

The Effect of Risk Rating Agencies Decisions on Economic Growth and Investment in a Developing Country: The Case of South Africa

“…If the bounds-test indicates cointegration between variables, an error correction model (ECM) is estimated and includes both short and long-run dynamics. It captures the degree to which short-run shocks are corrected to equilibrium (Da gdeviren et al 2012). The error correction term's coefficient has to be negative and with a significant p-value, indicating convergence to equilibrium and cointegration relationship between variables.…”

Factors Influencing Foreign Direct Investment Flows into Turkey

“…We find a coefficient of -0.401, which is a relatively large coefficient that indicates a quicker convergence to long-run equilibrium. We calculate the speed of adjustment following Mathisen (2003) and Dağdeviren et al (2012) as the inverse of this coefficient which shows the number of quarters it would take to eliminate half the deviation from long-run equilibrium. We find that 50% of the deviation in long-run equilibrium is eliminated in less than three quarters.…”

“…On the other hand, those events were the catalyst to trade liberalisation which can promote FDI inflows. Also, Turkey shifted from a fixed to a floating exchange rate regime, which increased the volatility of the Turkish lira and led to rising trade and current account deficits (Dağdeviren, Oğuş Binatlı, & Sohrabji, 2012). This instability can reduce capital flows.…”